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Biggest banks threaten 'future of capitalism,' Fed official says

Thomas Hoenig, the head of the Federal Reserve’s Kansas City branch, has made a name for himself as an implacable foe of Too Big to Fail financial institutions.

He tried to turn up the heat on the giants on Monday, making the case that they threaten capitalism itself.

Referring to the TBTF group by the official regulatory designation of “systemically important financial institutions,” or SIFIs, Hoenig said in a speech in Washington that they were “fundamentally inconsistent with capitalism.

“So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril,” he said.

The Dodd-Frank financial reform law passed by Congress a year ago was supposed to address TBTF in the wake of the 2008 financial meltdown and the banking system bailout that followed.

But raising capital cushions doesn’t get to the heart of the matter, Hoenig said. He wants to break up the giants by bringing back a version of Glass-Steagall, the Depression-era law that separated commercial banking from investment banking (i.e., Wall Street) until Congress tore down the wall in 1999.

“Dodd-Frank adds new layers of [regulation] but it fails to employ one remedy used in the past to assure a more stable financial system -- simplification of our financial structure through Glass-Steagall-type boundaries,” Hoenig, 64, said.

The protection of federal deposit insurance, as launched in 1933, was meant for commercial banks that focused on lending. It’s nonsensical for taxpayers to allow high-risk Wall Street businesses such as securities trading and brokerage to be included under that umbrella at the SIFIs, Hoenig said.

He dismisses the mega-banks’ assertion that trying to reconstruct Glass-Steagall would ruin the competitiveness of the U.S. financial industry.

“Under Glass-Steagall, U.S. banks and investment banks were highly competitive and successful as each specialized in lending to, or underwriting, businesses all over the world,” Hoenig said. “The United States led the world -- because it had strong, prudently run institutions that knew how to manage money in the best interests of the client.”

Hoenig’s views on Glass-Steagall haven’t made much headway in Washington, either in Congress or inside the Fed. He’s scheduled to retire from the central bank in October. But his latest speech suggests he doesn’t intend to go quietly.